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Software and services 'facing disaster'

UK software and services suppliers must take "drastic" action to avoid disaster, warns a leading analyst.

Profits are plunging and business failures are rocketing, yet software and services suppliers don't seem to realise the severity of the industry's growing slowdown, so are failing to react fast enough to the crisis, claimed Richard Holway, founder of industry researcher Ovum Holway.

Speaking for the last time at his annual Holway Presentation conference, the veteran industry researcher said that the economic climate for software and services companies will get much worse before its gets any better.

Bosses must act now to cuts costs and regroup around stable and profitable business lines, or their companies' financial situation will get dramatically worse, he added.

"We are going to have an increased number of company failures, and a lot more houses being repossessed. The number of receiverships being reported to us is going through the roof, and it's not just crazy dotcom companies," Holway told industry chiefs, including ICL chief executive Richard Christou.

"If your company relies on winning new projects from new customers, then you really are in for a tough time," said Holway.

Holway also launched a strong attack on what he sees as the UK's inexperienced and weak managers.

"Management in this industry isn't particularly strong, and most small companies don't have particularly good management," he said.

"A lot of them think it's all going to get better, but I don't think it will."

He further said that application hosting and renting - the application service provider (ASP) model - isn't going to bale suppliers out, because end-users aren't yet interested.

"Basically, the customers don't want it. They want to own the data, they want it on their hard disk. It's an emotional thing. The model will eventually happen, but considerably longer than we thought."

The industry will grow only by single figures for the next three years, in stark contrast to the double-digit growth of the middle and late 1990s, Holway predicted.

He also said that suppliers' profits will "hit rock bottom" this year.

"We are close to the point where [the software and services industry] actually collectively makes a loss," he said.

Financial markets won't recover the enthusiasm for IT-related flotations until well into next year, which will hinder the industry's recovery, Holway added.